Housing Starts Rebound Does Little for Homebuilders

Home construction is up but homebuilder shares show little reaction.
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U.S. home construction rose 4.3% in May, but on Wednesday the rebound seemed to do little for homebuilding stocks,

The Commerce Department said housing starts last month advanced to an annual rate of 974,000, up from a five-year low of 934,000 in April, marking the first increase since January.

Economists polled by Reuters had forecast almost 1.1 million units for May.

Shares of homebuilding companies, however, reacted tepidly to the news. 

At last check Toll Brothers  (TOL) - Get Report of Horsham, Pa., was off 1.3% to $33.63, Lennar  (LEN) - Get Report, Miami, was little changed at $64, D.R. Horton  (DHI) - Get Report, Arlington, Texas, was 1.4% higher at $58.83, and KB Home  (KBH) - Get Report slipped 0.8% to $34.09.

While states have begun reopening after the coronavirus pandemic shutdown,  Florida, Texas and Arizona this week set daily records for new coronavirus cases. The states were among 18 across the nation seeing a rise in cases from one week to the next, according to CNN.

Several analysts raised their price targets for Lennar, which reported strong second-quarter numbers, citing homebuyers moving to less densely populated areas as one driver of the results.

Wells Fargo analyst Truman Patterson increased his price target on Lennar to $72 from $67 while affirming an overweight rating on the shares. 

While Patterson said the near- and long-term prospects for Lennar and the market remain favorable for a variety of reasons, the path could be choppy. 

The analyst said Lennar's internal cost reduction and efficiency initiatives are helping the company widen its gross-profit margins.

Separately, U.S. mortgage rates fell to a record low again last week, prompting the biggest rise in purchase applications in more than a decade.

Also, the National Association of Homebuilders said Tuesday that builder confidence in the market for newly built single-family homes jumped 21 points to 58 in June. Any reading above 50 indicates a positive market, the association said.

"As the nation reopens, housing is well-positioned to lead the economy forward,” NAHB Chairman Dean Mon said in a statement. “Inventory is tight, mortgage applications are increasing, interest rates are low and confidence is rising."

Federal Reserve Chairman Jerome Powell is scheduled to testify - virtually - on monetary policy before the House Financial Services Committee on Wednesday at noon U.S. Eastern.